Okay, let's say you have the Social Security Trust Fund...

Let's say, hypothetically, that it is a bank account and all the Social Security taxes collected by the government are put right into the bank account. Real money. It is all there in the bank.

You are in charge of the fund.

You do the math and realize that the money in the trust fund is shrinking every day due to inflation. And one thing we know about interest paid on bank deposits is that it is always going to be way below the inflation rate. If the trust fund money just sits there it will shrink and shrink.

It has to be invested somehow.

But this is money people need. Maybe you could get a good return on the trust fund putting it into the stock market or corporate bonds, but that is too risky for the cumulative retirement savings of a nation.

You want the best rate you can get with a minimal chance of loss. So what would you invest in?

That's easy... long-term US Treasuries.

And this is why claims that the trust fund is full of "worthless IOUs" irritate me. It is going to be full of US Treasuries anyway. The Treasury obligations in the trust fund are slightly different from publicly traded treasuries, and I would prefer they were standard tradable Treasuries, but the bottom line remains the same. One way or another the trust fund is going to be full of promises of future money. Yes, we could diversify and include promises of future money from Japan or the UK, but in general terms the bulk of funds for Social Security are going to be in bonds, not cash.

If politicians decide to not honor the Social Security trust fund then that is what they will decide to do, because they are evil bastards. But if they do that it will not be because the trust fund is full of Treasury debts. It will simply be because that's what they decide to do. (Politics, not finance.)

1. kr. the propagandists try to make out its a problem with SS's structuring, when it's a political

2. Great post. The fate of the trust fund really is a political choice and nothing more.

Politicians may decide to make the surplus permanent through cuts and only then will the theft be complete. As of now SS is beginning to draw down the surplus funds built up by design since the reform of 1983.

The system is working just the way it was supposed under that law and it will be completely solvent for at least another 15 years.

If you listen to people who tell you about "worthless IOU's" and you follow their advice to accept cuts because the money is gone you'll make them right. The trust fund really will be "worthless IOU's" at that point

3. There Is one nuance that needs to be

Spelled out......

SS is "off budget". The budget deficit does NOT include SS in any way. ( except perhaps the interest paid to the SSTF on their holdings of US Treasury securities ... I have to check that out ). But if the budget deficit is 500 billion dollars and SS has a 100 billion surplus, that does NOT reduce the deficit to 400 billion dollars. What it DOES do is reduce the amount of the 500 billion deficit that the government has to borrow IN THE MARKET.

The deficit is 500billion, but they only need to raise 400 billion in the market. The rest comes from selling 100 billion to the SSTF. This is how it was designed.

So the SSTF has been sort of a captive market for the Treasury. They only have to go to the open market to finance a portion of each year's deficit.

But....

What about when SS itself has a deficit? IE SS takes in less in taxes than it pays out in benefits. I think this is the first year that will happen. Then, the process works in reverse.

Suppose the government budget deficit is 300 billion dollars. But suppose further that SS has to pay out 80 billion in benefits in excess of what they collected in taxes. Where do they get the money? They redeem 80 billion of their treasuries. Ok. Where does the treasury get the money from if the government already has a deficit. They borrow it in the market. So, the budget deficit is 300 billion but they have to go to the market to raise 380 billion dollars in the market..... 300 to finance that year's budget deficit and 80 to pay off SS

So, SS doesn't impact the budget deficit, but does impact how much the government has to raise in the market.

To turn the 2.6 trillion in assets in the SSTF into the cash needed to make future payments, those assets have to be redeemed. Which means that, since the government seems likely to continue running budget deficits, to get that cash the government will have to borrow an additional 2.6 trillion dollars in the market. That is an additional 2.6 trillion on top of what they need to borrow to cover the annual budget deficits.

Seeing as how we already owe 14, 15 (is it 16 yet?) trillion dollars, the question is this .....is there a limit to how much the US can borrow at reasonable interest rates? Is the well bottomless? And if it is not, What will interest rates have to be to attract enough cash to meet our future borrowing needs?

In a sense, the current crisis atmosphere around the world plays into our hands as it increases demand for Safe assets. And nothing is safer than US treasuries. So the "flight to quality" helps keep rates down and US borrowing costs relatively low. But the crisis atmosphere abroad won't last forever. What happens to demand for US Treasuries when the Euro is "safe" again?

4. gold i tells ya! it should all be put into teh gold!

5. First, thing

I'd stop loaning it to a government that is already overspending so much it has to borrow from a trust fund. The money belongs to the people who rely on it not TARP recipients or any of that other screwiness.

SS has money, we just need to stop giving it away.

It has to be invested somehow.

Except gov't bonds aren't an investment. The gov't does not make money like companies do; the gov't takes money from people -- people who already paid into SS once. Now they're paying twice (initial payment and cost of the bond), plus inflation, plus interest for a one-time payback which is now so jeopardized they will have to pay 3 times for a thing most of them will never see.

7. A sovereign currency government can always make good on its same currency debt obligations.

This includes bonds held by the SS Trust Fund.

Why would you ever want the fund to hold anything other than sovereign debt instruments? This is an insurance program, not an investment program.

The "trust fund" is essentially an accounting trick since it would make no sense for the federal government to "save up" something which it is able to create in unlimited quantities. Imagine living on a beach and saving up grains of sand and drops of ocean water.

8. That is a nice theory and all but it is totally inaccurate

The real problem is that the people who manufacture all of our imported crap don't contribute anything into our programs like Social Security, Medicare and to pay the salaries and benefits for our state, federal and municipal employees.

When that happens we get what we have right now. SS benefits going down and no money to pay our state, federal and municipal employees.

This is not complicated at all. It is basic economics. Think about it.

9. Why do you think U.S. Treasuries are valuable?

They do not represent money, they represent debt. They are not backed by anything. When a U.S. Treasury bill is redeemed it is replaced with another one. That can not go on forever because China, etc. will refuse to continue to fund the U.S. government. Another source of U.S. Treasury revenue is -- guess what?-- S.S. funds. That is an accounting scheme which can not last. That is why the S.S. Trustees have said in every annual report in recent years that the S.S. system is unsustainable and new revenue must be found. Their words not mine.

12. Keep putting your head in the sand.

11. What a bunch of jibberish.

China doesn't fund our debt. Government debt is not true debt. The US government never needs to borrow (or tax) to make good on its debt obligations. Virtually anyone on the planet would be more than happy to accept your "worthless" treasuries.